Eskom still pursuing mandatory savings
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January 2012 | Issue 134
Eskom still pursuing
mandatory savings
Competition amendment Plans to raise SA Growth of cementitious
act still to be university enrolments sales increased by 3.3%
implemented from current 900,000 to in 2011
1.5 mio by 2030
Build Trends Page 1
May 2010 | Issue 117compulsory.
Overall, Eskom's top customer grouping also included
Macro-economic trends impacting entities, such as the large municipalities, that had not made
on the construction industry much progress in reducing demand.
Dames warned that 2012 would be ―particularly tight‖, owing
State-owned power utility Eskom has reiterated its call for to the fact that no new major supply would be introduced
South Africans to urgently reduce electricity demand by while demand was still increasing, albeit at a slower rate
10%, or some 3 000 MW, adding that it is continuing to than initially anticipated.
pursue plans to ensure that the energy conservation Demand had returned to 2007 levels, with the summer daily
scheme (ECS) be made mandatory so as to improve peak of just over 30 000 MW and winter demand likely to
savings certainty and enable it to ramp up planned peak at above 37 000 MW.
maintenance. Further, the first unit of the coal-fired Medupi power station,
Providing a power system which was under construction in Limpopo, would not be
update in Johannesburg introduced during 2012 as initially envisaged. In fact, Dames
recently, CEO Brian Dames indicated that the first unit was currently only scheduled to
be introduced late in 2013, but that efforts were being made
Eskom calling for said the system would remain to align the schedule to the first quarter of 2013 schedule
South Africans to constrained for the coming five outlined in the Integrated Resource Plan, or IRP, for
years, while the maintenance
urgently reduce backlog had become electricity.
electricity demand unsustainable. Savings were, In the meantime, much of Eskom's attention had turned to
by 10%. therefore, needed to create the reliability of the existing fleet, much of which was
"space" for the utility to approaching 30 years.
implement its proactive There was a need to accelerate maintenance efforts at a
maintenance schedule across all of its 58 units. rate of around 10% of installed capacity during the summer
Eskom was still forecasting a 9 TWh shortfall for 2012, maintenance peak. But owing to the supply constraints,
equivalent to the operation of a 1 000 MW power station. Eskom had been failing to introduce outages as planned
Public Enterprises Minister Malusi Gigaba encouraged and was shifting maintenance out in a bid to keep the lights
corporate South Africa, as well as private citizens, to take on. This was increasing the vulnerability of the system to
voluntarily steps to reduce their demand to ensure system unplanned outages in the longer term and was thus
stability and to create room for continued economic growth. ―unsustainable‖.
He said catching up on maintenance was "no longer an Besides the focus on the ECS and its maintenance
option". programme, Eskom was also pursuing a range of other
"Eskom has a highly developed maintenance policy, which demand- and supply-side interventions to shore up supply
is designed to ensure that areas at risk are addressed in ahead of the introduction of capacity from Medupi and
order of priority through a consistent schedule of Kusile.
maintenance and inspection work across its fleet of power It was interrogating various importation options from the
stations," Gigaba said, warning that any further deferral of region, including the prospect of importing natural gas from
maintenance would pose significant risks to the safety of countries such as Mozambique, possibly for use in its gas
assets and people, while placing security of supply in turbines at Mossel Bay and Atlantis, in the Western Cape.
jeopardy. Currently these open-cycle gas-turbines (OCGTs) were
Dames said Eskom required greater certainty on demand fuelled using diesel and were, thus, a significant cost
reductions and would, thus, continue to pursue a mandatory contributor.
ECS in its negotiations with business and labour at the On average Eskom produced electricity at a cost of
National Economic Development and Labour Council, or 38c/kWh. But the cost of production at the OCGT plants was
Nedlac. between 150c/kWh and 250c/kWh, depending on the diesel
These discussions had been under way for a number of price.
years and business had continually raised objections to a The utility was also procuring all available power from non-
mandatory scheme, saying it could result in the curtailment Eskom sources, having secured 1 000 MW of such capacity
of growth and a reduction in jobs. from independent power producers and municipalities.
Dames stressed that such a compulsory scheme would only It was also moving ahead with demand-side management
be deployed as a last resort ―safety net‖, while also schemes and had entered into agreements with large
welcoming the voluntary efforts that had already been made customers to enable it to buy back power in times of system
to reduce demand. distress.
However, its top 250 customers had, thus far, only managed It was also in the final stages of implementing an innovative
to reduce their demand by 1% against a 2007 baseline, demand aggregation model and hoped to have some 500
even though Eskom's 95 leading industrial customers had MW of such buy-backs available by winter 2012.
achieved average savings of 6.9% against that baseline.
In fact, some mining companies had already breached the Source: Engineering News, Terence Creamer, 30 January 2012
10% savings level and would not be asked to make further
mandatory cuts should it be agreed that the ECS be made
Build Trends Page 2Month-end window dressing components of the CPI were barely changed in December.
help boost South African Nonetheless, the fact remains that the overall rising trend in
stocks to their best January CPI inflation which has been in place since September
performance in six years, as 2010, remains in place. Furthermore, the CPI inflation rate
SA stocks post best unit trusts and hedge funds also remains above the 6.0% upper end of the inflation
January in years. loaded up on rising shares to target. So long as this is the case and this is likely to be the
bolster their portfolios. case for the rest of this year, it is unlikely that interest rates
The Top-40 added 0.44 will be reduced. On the contrary, given the steep increase in
percent on Tuesday, 30 January to 30,176.19, bringing the certain food prices and some other commodity prices,
month's total gains to 6 percent and making January's including the Rand price of crude oil, in recent times, the
performance the best start to a year since 2006. CPI inflation rate still has some upward scope over the
"A good start in January typically means you'll have a good coming year.
year," said Michael Carlsson, a trader at Consilium Capital, The elevated level of PPI inflation makes this relatively
adding that Tuesday's gains were largely from month-end pessimistic prognosis for CPI inflation all the more plausible.
window dressing. This could yet compel the monetary authorities to increase
Window dressing refers to a strategy where portfolio interest rates, albeit modestly, in the second half of the year,
managers buy better performing stocks near the end of a especially in the event that the real economy does not
month or quarter to improve fund performance. collapse.
Johannesburg's broader All-share index closed 0.48 percent For the whole of 2011, inflation averaged 5.0%, which was
higher at 33,792.48, after hitting a series of lifetime highs 0.7% up on the 4.3% inflation rate of 2010, but was still
during the month. down considerably on the 9.9% and 7.1% inflation rates of
"For the rest of the week we'll consolidate. Some of the 2008 and 2009 respectively. For 2012 as a whole, one
shares have run too much and we'll see a little bit of a pull predicts an average inflation rate of around 6.3%, i.e. higher
back," Carlsson said adding that the market's focus would than in 2011.
remain on the euro zone.
Top performers so far this year have been resources firms, Source: Econometrix, 18 January 2012
with BHP Billiton and Exxaro Resources both rising more
than 12 percent. Y-o-y growth in retail sales at constant prices slowed
Retailers, among some of last year's best performers, have marginally in November, to 6.8%, from an upwardly revised
continued their advance into 2012, buoyed by optimism 7.5% in October. It does not really constitute a major
about consumer spending and their Africa expansion plans. softening in the performance of the retail market over the
Woolworths is up 7.5 percent so far this year, following a 45 Christmas period.
percent gain last year. What is conspicuous is the fact that growth in sales of
In Tuesday's trade, Murray & Roberts dove more than 4.3 general dealers, i.e. the main chain stores, was fairly brisk in
percent to 26.80 rand after the construction company contrast with a moderate slowdown in the growth of sales of
proposed a 2 billion rand rights issue to cut debt. dealers in clothing, footwear and textiles and dealers in
M&R, along with other construction companies in Africa's furniture and appliances. This supports our expectation for
biggest economy, has been struggling in recent times after consumer spending in 2012 which sees growth in sales of
the end of the building boom ahead of the 2010 soccer durable and semi-durable goods slowing from double-digit
World Cup. levels in 2011, but growth in sales of non-durable goods
Consumer food maker AVI rose 3.75 percent to 41.50 rand, remaining solid.
after the company said its first-half profit increased 31.5 On the one hand, pre-emptive buying of durable and semi-
percent to 194.4 cents. durable goods in order to beat off price increases expected
Trade was robust with 233 million shares exchanging to emanate from the sharp depreciation of the Rand in the
hands, preliminary bourse statistics showed. This compares second half of last year has meant that buying of such
with last year's daily average of around 256 million shares. goods was brought forward from 2012. Furthermore,
relatively lacklustre growth in employment, coupled with a
Source: Reuters, The Sharenet Daily, 31 January 2012 lower rate of increase in public sector remuneration than last
year, will detract from some of the strength of consumer
spending seen in 2011. On the other hand, the maintenance
Markets may take some encouragement from the fact that of interest rates at 38-year lows is likely to continue
the y-o-y CPI inflation rate was unchanged in December, providing some support for consumer spending. Overall,
from November's 6.1% figure. It was significantly lower than growth in consumer spending is expected to be somewhat
consensus forecasts which were looking for a 6.3% softer in 2012 than in 2011, but still moderately positive.
outcome. Retail inflation, as measured by the difference between
One suspects that analysts overestimated the extent to growth in sales at current prices and growth at constant
which food prices and owners' equivalent rent will have risen prices rose marginally in November, to 4.4%, from 4.3% in
in December. In addition, analysts may have not considered October and 1.0% a year ago. This falls into line with the
the substantial magnitude of downward pressure on petrol rising trend of overall CPI inflation, but remains lower than
inflation in December for statistical reasons, out of the latter because inflation of services, which is incorporated
proportion to the modesty of the reduction in the petrol price. into CPI, but not into retail sales, remains more elevated
Overall, the inflation rates of most of the different than the inflation rate of goods.
Build Trends Page 3With a continuing relatively robust performance in respect of In the case of heavier commercial vehicle sales, the
consumer spending, there is no way that the argument of an December declines were even steeper than in the case of
urgent need to reduce interest rates to boost economic the light commercial vehicles. Growth in MCV sales fell to
activity, holds much water. -9.1%, from 1.5% in November and an average growth rate
Notwithstanding the fact that the December CPI inflation of 15.3% for the whole of 2011. In the case of HCV sales,
rate came in lower than consensus forecasts, these latest growth tumbled to -31.9%, from 2.3% in November and an
retail sales figures are bound to dismiss any hopes of a average of 18.5% through 2011. In the case of heavy
reduction in interest rates in the short term. commercial vehicle sales, a shortage of supply as distinct
from a dramatic fall off in demand appears to be a more
Source: Econometrix, 18 January 2012 valid explanation.
The weak performance visible in the December 2011 sales
Mercedes-Benz South Africa has stopped reporting new data was exacerbated by the fact that Mercedes Benz South
vehicle sales and export sales figures after receiving a Africa has been instructed to stop reporting sales by its
directive from German parent company Daimler. German parent company, the latter currently under a
Daimler, the world's number one truckmaker and under European Union Competition Commission enquiry.
investigation by the European Union for possible violation of Econometrix estimates that the reported passenger car
antitrust rules, has told Mercedes-Benz SA to stop reporting sales lost 950 units because of this during December, LCV
sales figures. sales lost 50 units, medium commercials lost 150 units and
"This is in order to determine whether this reporting could be total commercial vehicle sales of 8.5t GVM lost 350 units
interpreted as anti-competitive," Mercedes-Benz SA said. because of MBSA’s inability to report. The impact on growth
The South African association of automobile manufacturers increase as one heads upwards through the CV mass
has delayed December new vehicle sales data by a day to categories where Mercedes Benz has an increasingly
allow for the announcement. Mercedes-Benz sells about important market share. MBSA is also a major exporter, and
2,000 - 3,000 vehicles a month. the lost reported sales will have contributed to the
weakening exports scenario discussed below.
Source: The Sharenet Daily, January 2012 Growth in vehicle sales in December was extremely weak
and below expectations, but one will need to wait until after
January to see whether this represents the start of an
Vehicle sales in December entrenched trend of weakness. Having said that, for some
were weak in virtually every months now we have been suggesting that vehicle sales in
category. In many instances, 2012 stood to be lower than predicted by many analysts on
December vehicle growth was at its lowest level
account of the fact that sales in 2011 were boosted by pre-
sales figures weak throughout 2011. However,
emptive buying to beat off expected price increases, and
across-the-board, December typically is the this will have brought forward some of the demand that had
due to unusual weakest month of the year for been expected to emerge in 2012.
reporting vehicle sales as buyers lay off Since some of the demand for vehicles expected to emerge
circumstances. purchasing until January in in 2012 has already been satisfied during the current year, it
order to secure a New Year is questionable whether further stimulus to sales from lower
registration, while the supply interest rates or other incentives, can really assist in
side enters a period of factory close-downs for annual boosting the 2012 vehicle market to any significant extent.
vacation and maintenance programmes. Accordingly, it is We continue to suspect that sales in the lighter categories
dangerous to pay undue credence to sales figures for this will show negative growth this year, whilst in the heavier
particular month as a barometer of underlying trends. vehicle categories growth will be at most at single digit
There are additional reasons for treating the weakness of levels, in contrast with the high double-digit growth rates
December vehicle sales with circumspection. Firstly, earlier achieved for much of 2011.
months were characterised by substantial pre-emptive Vehicle exports were also weak in December, with growth in
buying to beat off expected price increases as a result of the NAAMSA passenger vehicle exports down -48.8% in the
Rand's steep depreciation. By December, one suspects month compared with -31.0% in November and an average
such pre-emptive buying had been largely saturated. of 0.8% for the whole of 2011. In the case of LCVs, growth
Furthermore, the unexpected surge in vehicle sales in in exports was -21.4% in December, only marginally up from
earlier months had depleted inventories and so part of the the -22.8% in November and a positive average of 47.7%
reason for the weakness in sales in November and for the whole of 2011. Clearly, the reduction in global
December appears to have been associated with a lack of growth, combined with the shortage of components resulting
available stock. Thirdly, stock availability may also have from the floods in Thailand, played an important role.
been impaired by the lagged effects of the disruption to
component supplies as a result of floods in Thailand in Source: Econometrix, 10 January 2012
October.
Y-o-y growth in passenger vehicle sales fell to 7.5% in
December, from 12.5% in November and an average of Parliament passed the Competition Amendment Act more
18.2% for 2011. Growth in LCV sales declined less than two years ago, and the president signed it into law, yet
markedly, to 12.6% in December, from 13.3% in November there is still no word on its implementation.
and was slightly down on the full-year growth of 12.9%. The act was amended following unparalleled successes by
Build Trends Page 4the Competition Commission South Africa's central government took direct control of parts
in unravelling cartel activity in of several provincial administrations recently in a
SA. clampdown on profligate spending and to try to iron out
The amendment seeks to long-running problems with shoddy public services.
Sterner make it a criminal offence for a A cabinet statement said Pretoria had assumed authority
competition law company, its directors and over nearly every area of administration in the troubled
yet to come into managers to be involved in, or northern province of Limpopo
force. knowingly acquiesce to, after it asked for a 1 billion
collusive behaviour. Directors rand overdraft to pay civil
and managers could spend up servants' salaries.
to 10 years in prison or be fined up to R500 000. Central Limpopo, the home of
This decision was similar to one by the Cabinet which government controversial African National
approved amendments to the Broad-Based Black Economic clamps down on Congress (ANC) youth leader
Empowerment Act to make provision for a fine or profligate Julius Malema, has been
imprisonment for individuals implicated in fronting.
provinces. plagued by allegations of
The amended Competition Act will be applied mismanagement and
retrospectively, so that all new cartel cases are dealt with corruption, especially in the
under it. award of government
The national advocacy programme manager of the Black contracts.
Sash, Nkosikhulule Nyembezi, said SA was labouring under Finance Minister Pravin Gordhan, who is under pressure to
a crippling delay, largely due to a lack of political will in the keep public spending in check, said his department had
implementation of the Competition Amendment Act of 2009. been concerned for several months about "financial
Speaking ahead of the Fourth National Anti-Corruption management and the potential for overspending".
Forum Summit, Mr Nyembezi said the delay was a setback, "We owe it to taxpayers of this country to ensure that their
not only for measures to fight corruption but also for the money is spent well and that there will be proper returns,"
country’s democracy in general. he told Talk Radio 702.
"The real concern on this matter is the action — or really the Under the terms of the takeover, the central government will
lack of action, the deafening silence — of the executive assume direct control of Limpopo's finances, as well as the
branch of government," he said. Sporadic efforts by the education, transport, health and public works departments.
government to combat corruption showed a weak or It will investigate alleged corruption and maladministration,
wavering political will. Gordhan said.
When asked to comment on the delays in finalising the Pretoria has also stepped in to oversee the finances and
amended act, the president’s office first referred Business police and transport sections of the Free State, and will help
Day to the Department of Trade and Industry — which is no sort out a funding crisis in the health sector in the
longer responsible for the competition authorities — then to commercial hub of Johannesburg.
the Department of Economic Development, without Since the end of apartheid in 1994, South Africa's African
indicating when President Jacob Zuma would proclaim an National Congress-led (ANC) government has spent billions
implementation date. of dollars to improve public services for the millions of
Andries la Grange, a director at the law firm Cliffe Dekker blacks largely ignored under white-minority rule.
Hofmeyr, said those close to the process no longer had any However, its efforts have been hampered by corruption and
word regarding where the process was headed. a lack of qualified officials at the provincial and municipal
It appeared as if the regulations and the working agreement levels especially since many bureaucrats were replaced
between the Competition Commission and the National after the 1994 election that brought the ANC to power.
Prosecuting Authority had not yet been finalised, said Mr la
Grange. It also seemed as if there was a lack of political will Source: Reuters, December 2011
to finalise these matters, he said.
The Competition Amendment Act has been the focus of
severe criticism, with some describing it as a badly advised South Africa's government
piece of legislation. There was scope for constitutional plans to raise university
challenges and the competition authorities had warned that enrolments from a current
it could hamper, rather than strengthen, the investigations of Plans to raise SA 900,000 to 1.5 million by
the commission. university 2030, to achieve a
Mr la Grange said the commission’s corporate leniency participation rate in higher
enrolments from education of 23%,
programme had been an important tool in its fight against
cartels. If directors were to face jail sentences, they would current 900,000 to according to a green paper
not be inclined to incriminate themselves. 1.5 mio by 2030. published recently. The
However, in terms of the act, the commission could certify a target for colleges and
person as "deserving of leniency". other post-school
institutions is a whopping four million students - a six-fold
Source: Business Day, Amanda Visser, December 2011 increase over current numbers.
Last year the country's participation rate for 18- to 24-year-
olds was 16%.
Build Trends Page 5The Green Paper on Post-School Education and Training, It never rains but it pours for the cash-strapped University of from the Department of Higher Education and Training Swaziland as it has once again postponed opening for the (DHET), sets a sweeping agenda for post-school education second semester owing to a shortage of funds. in the coming two decades, including new funding, access The government of Swaziland, which is grappling with a and redress policies for universities. financial crisis, has failed yet again to give the university It was approved by cabinet in November and is out for enough money to run the institution. public comment until 30 April, after which a white paper will The university was scheduled to open at the beginning of be developed. February but Registrar Sipho Vilakati has confirmed that this The purpose of the green paper, said Minister of Higher will not happen. Education and Training Blade Nzimande in a statement, The institution needs 22 million emalangeni (about R21 was to present emerging thinking in the DHET. It aimed to million) a month for administrative, maintenance and salary align the post-school education and training system with costs. South Africa's overall development agenda, with links to The university's Senate met very late on the 27th of January various national development strategies. 2012 and decided to postpone the opening of the second The paper's broad policy is "expanding post-school semester. provision to improve access to education and training The academic year 2011/2012 has already been disrupted opportunities, strengthen institutions to improve education as the university postponed opening last August after the quality, and build a post-school education and training government failed to come up with 80 million for system that is equitable, accessible and affordable to all administration and other costs. sections of the population, including free education and ―Following careful consideration of all factors required to training for the poor." make the smooth operations of the university possible, the There is a focus on young people between the ages of 18 Senate resolved to postpone the commencement of the and 24, three million of who are not in education, training or second semester until further notice,‖ he said in a brief employment. "This is an appalling waste of human potential, statement. and a potential source of serious social instability," Vilakati apologised to students, staff and all other Nzimande said. stakeholders on the latest disappointing developments. South Africa's 23 public universities, which he described as The University of Swaziland is the country's only university. "the strongest and most stable component of the post- It has three campuses and a combined student population school system", will be expected to take in a further 650,000 of about 7,000. To operate the university relies on revenue students over the next two decades - a considerable from the government as well as its own independant expansion. initiatives. However, he added, even some universities are beset by Making matters worse is that the institution has also not serious problems and require special interventions. There released results for first semester examinations taken in are challenges in areas including access, forms of December. First year students have also not received their discrimination, staffing, curriculum, management, student allowances from the government. funding and other forms of student support. Student Representative Council Chairperson Sibusiso "The DHET will work with the Department of Science and Nhlabatsi has reacted with shock and disappointment at Technology to ensure increased support for postgraduate these latest developments. He promised they would do all in study and for senior researchers, as well as a more stable their power to force the university to open and the funding model for all educational institutions that conduct government to hand out allowances to first year students. research. Improving research capacity will be a major focus for universities, with a particular focus on research to meet Source: Sunday Tribune, 28 January 2012 our developmental objectives," Nzimande said. Another important goal was to support previously disadvantaged universities, especially in rural areas, including assistance to improve infrastructure as well as the quality of teaching and research. "It is essential that, whatever else universities do, in today's South Africa they must be at least able to provide a good undergraduate education to their students. Almost 18 years after the end of apartheid it is disturbing that some of our universities still can't do even this." Outside the university sector, a six-fold expansion to four million enrolments in colleges and other post-school institutions will raise the country's participation rate to 60%. The plan is to massively expand the public further education and training college sector, with high priority given to building capacity, management, governance and quality, with universities providing support for this work. Source: University World News, Karen MacGregor, 15 January 2012 Build Trends Page 6
upgrades to older office blocks, and some government work,
such as school and hospital building programmes in some
Building and construction trends provinces.
Source: Business Report, Roy Cokayne, December 2011
Confidence in the building industry rose to its highest level
in a year in the fourth quarter of 2011, spurred by increased Thousands of poor South
confidence among retailers and manufacturers of building Africans don’t have a title deed
materials. for the property they believe
However, the FNB/Bureau for Economic Research building they rightfully own. This
confidence index still showed on Thousands of poor emerged in an initiative
average that seven out of 10 South Africans recently commissioned by
respondents in different sectors
don’t have title FinMark Trust and Urban
of the industry continued to rate LandMark. The study
deeds for their
Building prevailing business conditions as properties.
considered the performance of
unsatisfactory. the government-subsidised
confidence ticks The index increased to 29 in the
housing sector and to what
up. fourth quarter from 23 in the third extent home ownership was
quarter. It can vary between zero helping to create wealth.
and 100, with zero indicating an The research was undertaken in three townships. One of
extreme lack of confidence and 100 extreme confidence. the people interviewed was Perseverance, whose first name
The composite building confidence index rose because of a only is given. She lives in Emaplazini in KwaZulu Natal. For
32 index point gain in the confidence levels of building more than a decade she shared a two-bedroom house with
material merchants from 17 points in the third quarter to 49 her sister and her sister’s family. She lives on a social grant
points in the current quarter and an 8 index point rise in the she receives from government for her two children. But
confidence of building material manufacturers to 12 points three years ago, she heard there was a modest RDP house
from 4 points in the previous survey. for sale down the road. The owner and Perseverance
Cees Bruggemans, FNB’s chief economist, said the rise in agreed on a purchase price of R13 000.
the composite confidence index provided more evidence The house has been paid off, but other than an affidavit
that the building industry was slowly beginning to recover. made at the police station at the time of the sale, she does
However, Bruggemans said the recovery was not spread not have a document showing it is hers — she has no title
uniformly across all sectors making up the building sector deed. She recently heard the seller’s family is unhappy
and continued to be characterised by short-lived flare-ups in about the sale. She fears they may claim the property.
activity. The FinMark Trust and Urban LandMark study shows about
He added that in the fourth quarter retailers and 1,5m government-subsidised properties are not formally
manufacturers of building materials saw a faster rise in registered at the deeds office. This is more than half (51%)
sales and residential building activity picked up, but non- of the 2,94m housing units built since 1994 for households
residential activity faltered. ―Architects and quantity earning less than R3 500/month. Since 2005, registration
surveyors saw contracts awarded rise, which bodes well for rates have plummeted. The 1,44m government-subsidized
the future.‖ properties that have received formal title deeds since 1994
Bruggemans attributed the higher building material sales to represent nearly one-quarter (24%) of the 6m residential
the need to do maintenance and renovations of existing properties registered at the SA deeds office. If the 1,5m
buildings after a long delay. unregistered subsidized homes were to be added to the
The confidence of architects, main contractors and sub- deeds registry, the lower income sector would comprise
contractors barely moved, while quantity surveyors nearly 40% of SA’s entire residential property market.
registered the only decline, by 7 index points to 36 points. Kecia Rust, housing finance co-ordinator for the FinMark
Bruggemans said it was encouraging that both architects Trust, says though the initial intention of government’s
and quantity surveyors saw more projects progressing from housing subsidy programme was to provide shelter for the
sketch plan and working drawing stage to contracts poor, by early 2000 the view was widely adopted that low-
awarded. income households should also be able to use their homes
―Bar postponements, this recovery in contracts awarded as an asset to build wealth. ―But without title deeds,
bodes well for the building industry, particularly the non- beneficiaries of subsidised houses have no legal claim to
residential sector, which is the main user of these ownership. That means they cannot trade their properties
professional services,‖ he said. and are being denied a critical point of entry into the formal
The overall confidence of main contractors declined by 1 property market.‖
index point to 19 points in the fourth quarter, while the The study also reveals that of the 2,94m units referred to
confidence of residential contractors increased to 22 from above, only around 3% (or 90 858) have formally changed
20 and that of non-residential contractors fell to 14 from 21. hands.
Bruggemans said this was a bit of a surprise because the Rust says without an active secondary market at the lower
non-residential sector had outperformed the residential end, SA will battle to eradicate its estimated 2,3m housing
sector in recent times. He said non-residential work had shortage. There is now a particular shortage of housing
been sustained by some private sector work, such as stock priced at R150 000 - R250 000, aimed at the gap
Build Trends Page 7market — families earning too much for a government deposit, with an estimated resource of 300 million tons, to
subsidy but too little to qualify for a mortgage bond. The closely held Kuyasa Mining Ltd. to extend the life of its
cheapest homes on the market start at R250 000. Delmas Colliery in the Mpumalanga province in the
Subsidised home owners could bring plenty of stock to the northeast of the country. BHP sold the operation to Kuyasa
market to fill the gap. in 2002. Becsa ―is not in a position to comment‖ on the
The report recommends that the state urgently look at valuation of the deal, Nayager said.
dealing with the registration backlog. Becsa in January said it will sell some of its undeveloped
Other industry players believe the way to improve deeds coal assets to focus on its existing operations.
office registration rates and stimulate a secondary housing Pembani owns a 20 percent stake in oil refiner and fuel
market is to better educate low earners on the legalities of retailer Engen Ltd., the South African unit of Malaysia’s
home ownership. Petroliam Nasional Bhd., and bought a 51 percent stake in
Yusuf Ebrahim, head of the conveyancing department of Imbani Coal Ltd. from Anglo American Plc in 2006. It’s also
legal firm Ivan Pauw & Partners, says the low transfer rates converting debt it is owed by cement maker AfriSam Ltd.,
of subsidised houses can be blamed partially on flawed South Africa’s second-largest cement maker, into shares.
administration processes, which delay the flow of subsidy
funds from housing departments to developers. But he Source: Bloomberg, December 2011
believes the key problem is a limited understanding among
the beneficiaries themselves of how the deeds registry
process works. JSE materials supplier Afrimat (AFT) has entered into an
He says banks have been very successful in educating agreement to acquire 100% of the issued ordinary share
lower-income mortgage applicants on the legal aspects of capital of SA Block and its
home ownership. ―Deeds office registration and transaction 100% owned subsidiary
rates could be vastly improved if we did the same for the Clinker Supplies for R123.5
subsidised housing market.‖ million. The sellers included
Aureos Southern Africa Fund
Source: Financial Mail, Joan Muller, December 2011
Afrimat buys LLC, Hans-Elisabeth Pfeffer,
Clinker Group for S.A. Block Employees Trust
R123.5m and Karl-Anton Pfeffer.
BHP Billiton Ltd., the world’s biggest mining company, said The parties to the transaction
it will provide funding to assist a group of black investors led highlighted complementary
by Pembani Group (Pty) Ltd. to buy a stake in its South and supplementary strengths between Afrimat and the
African energy coal unit. Clinker Group by way of rationale for the transaction.
The company declined to comment on the value of the ―Leveraging these combined strengths will result in new
transaction, which will see 8 percent of shares in BHP revenue opportunities as well as increased profitability,
Billiton Energy Coal South Africa, known as Becsa, specifically through product development and a focused
transferred to the black-owned group. Pembani, formerly marketing strategy,‖ Afrimat said.
known as Worldwide African Investment Holdings (Pty) Ltd., The Clinker Group currently returned profit after tax of
is chaired by Phuthuma Nhleko, a former chief of MTN approximately R30.0 million per annum which would equate
Group Ltd., Africa’s biggest mobile-network company, and a to a return on equity on Afrimat's investment of
current director of BP Plc. approximately 24% per annum.
The company will provide a loan ―broadly on commercial Afrimat CEO Andries van Heerden said: ―The acquisition is
terms‖ to Pembani to finance the purchase, Kesagee in line with our strategy of seeking out new avenues for
Nayager, a spokeswoman for BHP, said in an e-mailed growth and presents us with a unique opportunity to
response to questions. ―It is expected that Pembani will generate further revenue opportunities through new product
service their loan commitment from the normal dividends development as well as a refined, focused marketing
paid by Becsa to its shareholders.‖ strategy.‖ The Clinker Supplies group has a profit after tax of
South African mine operators must have 26 percent black approximately R30.0 million, which would equate to a return
ownership by 2014 to redistribute wealth to those on equity for Afrimat of approximately 24% per annum.
disadvantaged under apartheid. Operators’ mining rights The acquisition also provided Afrimat with a hedge against
can be withdrawn should they not meet the requirements. the volatile cyclicality associated with the aggregates
The governing African National Congress’s Youth League is industry. ―Due to clinker's distinct characteristics, which are
calling for nationalization of mines because the pace of difficult to substitute, it has proven resistant to market
change is too slow. fluctuations,‖ van Heerden said.
Becsa, the country’s second-biggest exporter of thermal The full activities of the Clinker Supplies group included the
coal, is ―now in a position of more than meeting the extraction of clinker raw material from various stock piles
transformation requirements‖ of South African law and all its and the processing thereof into products of various
mining licenses have been converted to meet legal needs, it specifications, primarily for use in the concrete
said in an e-mailed statement. manufacturing industry. Clinker dumps had a life span of 10
BHP produced about 34 million metric tons of thermal coal years.
in South Africa in the fiscal year to June 30, of which about Key operations were located close to Vereeniging and
13 million tons were exported, Nayager said. Sasolburg with support services based in Alrode and the
The coal-mining company also agreed to sell an additional group supplied customers in the wider Gauteng market and
Build Trends Page 8adjacent Northern provinces. It was situated close to the
recently acquired Glen Douglas Mine, creating exciting Source: Financial Mail, Larry Claasen, December 2012
opportunities for synergy, Afrimat said. The processing and
manufacturing plants were well established and maintained,
it added. The importation in November of what is believed to be the
The effective date of the acquisition would be the last day of first bulk shipment of bitumen
the month in which all conditions precedent were met. The into South Africa went well,
purchase price would be settled by a combination of cash in says Much Asphalt CEO
the amount of R95 million and Afrimat ordinary shares, Phillip Hechter.
currently held as treasury shares to the value of R28.5 First round of ―The consensus is that, so far,
million. The number of Afrimat ordinary shares would be bitumen imports a the positives outweigh the
determined with reference to the 30 trading days Volume negatives. We have learnt
Weighted Average Price of Afrimat's ordinary shares on 9
success. some lessons and paid some
December 2011 being R4.35 per share. school fees, but next time it
will be a smoother process.‖
Source: I-net Bridge, 12 December 2011 Hechter says he ―firmly believes‖ there will be another round
of bitumen imports – even if local product remains the first
choice – as the bitumen shortage is expected to again rear
Brick maker Brikor’s numbers for the half-year to end- its head in 2012. However, he adds that sufficient storage
August was very disappointing and its auditors, KPMG, has space remains the biggest obstacle to imports becoming a
warned that there was ―significant doubt‖ it could continue regular event.
as a going concern. ―We need to apply our minds to the problem. It is also
KPMG points to the group’s R26,2m loss and ―other expensive, but when there is no bitumen, what is the
matters‖ in its results that have cast serious doubt on its alternative?‖
ability to operate on a sustainable basis. Colas, a binder supplier, imported around 4 000 t of 60/70
The group’s negative cash holdings of R19,5m and the penetration grade bitumen, with Much Asphalt securing a
departure in March of two non-executive directors, Elmar third of the shipment. The importation process follows an
Grobbelaar and Evelyn Chimombe-Munyoro, have hung acute shortage of bitumen in South Africa, owing to
over the group. The directors objected to the release of the complications at local refineries, especially relating to
year-end results to February because they wanted a ―few shutdown periods. Bitumen is used to produce asphalt,
items‖ clarified. which is used in road construction – which means the
Though no specifics were released around these issues, continuation of many road construction projects is heavily
other involved parties also seemed dissatisfied with what dependent on the supply of bitumen.
was going on. Its then designated adviser, Vunani Importing bitumen to resolve supply bottlenecks is not as
Corporate Finance, resigned from the position a few weeks easy as it may sound, however, as it took several days to
before the director exodus. The reason was what it called offload the November shipment. ―At times it rained so hard
the failure of executive directors to ―adhere to proper we had no option but to stop the offloading until it improved,‖
corporate governance‖ before publishing those numbers. In explains Hechter.
addition, chief operating officer Werner Kruger left his post ―The biggest problem was finding enough storage space for
at the end of August with immediate effect. the bitumen. The weather exacerbated this problem as our
Brikor clearly has an uphill climb but its new chairman, [Much Asphalt’s] plants were not producing, and could not
Rynhardt van Rooyen, who joined the board in May, says create space for the bitumen being off-loaded.‖
the group is turning itself around. It has created but not yet However, Hechter also noted that Colas did a lot of
filled the position of chief restructuring officer, to lead the homework on the process, drawing on the company’s
changes at the group, and has sold its Olifantsfontein international experience in this field.
property for R19m. ―The offloading gantry they built worked very well and
―We are looking at turning it around within the next 12 facilitated a seamless process of transferring the bitumen
months,‖ says Van Rooyen. Besides appointing a chief from the ship to the waiting tankers.‖
operating officer, he says, it is also looking at appointing a The ideal is to import a bulk shipment of between 5 000 t to
financial director. 7 500 t of bitumen, comprising two or possibly three different
Van Rooyen blames the group’s problems solely on the grades of bitumen, says Hechter. This means the first prize
economic downturn, rather than governance. ―It was only is to have a storage facility within 300 m to 400 m from the
the recession. There has been a big drop-off in business harbour, allowing the bitumen to be piped directly from the
across the construction sector.‖ ship into the storage area, from where it can be despatched
He also believes in the group’s management, led by CEO to the various sites as and when required.
Garnett van Niekerk Parkin. ―The current management team ―The problem is that there are no such facilities available at
built the company up and oversaw its listing. I’m confident South African harbours and to start a greenfield operation
they can still do the job.‖ Van Rooyen is not put off by the like this is going to be difficult and time consuming,‖ says
departure of senior management members and is Hechter. ―Firstly, there is very little land available around
committed to being a part of it for a while. ―I would not have the harbours and that which is available, is very, very,
joined the group if I did not plan to stay involved for some expensive. Once the land has been secured, you have to
time.‖ start the environmental-impact assessment, which is time
Build Trends Page 9consuming – at least 18 months – and only then can you the building industry closes during the month for the
start building the facility, which will take another year.‖ Christmas holiday season.
Hechter says this means the industry is looking at a costly On a quarterly basis, y-o-y growth increased to 7.1% in the
process that will take a minimum of three years from start to 4th qtr, from 5.7% in the 3rd qtr. This supports the view that
finish, this while the bitumen shortage presents an informal building activity may be fairly buoyant.
immediate challenge. In 2010, the y-o-y growth in cement sales was still suffering
Exacerbating the problem is that bitumen has to be stored in from the lagged effects of the 2008/09 recession. Therefore,
the tanks at about 135 °C to allow for it to be pumped. ―This one can be somewhat encouraged by the fact that y-o-y
requires a lot of very expensive energy,‖ explains Hechter. growth in cement sales increased to 3.3% in 2011, from a
―Then also remember that you probably only need this severely depressed -7.8% in 2010.
facility for the six months of the peak road-building season. Due to the likelihood that economic activity both globally and
For the other six months you will have a facility that is a bit domestically in 2012 is likely to be softer than growth in
of a white elephant, requiring expensive heating during the 2011 due to the ongoing sovereign debt problems in
cold winter months.‖ advanced economies, it is likely that the y-o-y growth in
He says only the oil companies – which are also the cement sales for 2012 will be similar to that achieved in
bitumen producers – have these kind of storage facilities 2011.
available. However, when they are in a shutdown period – The building industry has taken a knock in recent years, but
which is typically the period during which bitumen shortages it is unreasonable to expect it to continue declining
occur – they may have the storage space available, but not significantly in the coming year. Preventing an unduly
the heating or the pumping facilities to store and distribute severe further decline is the fact that interest rates remain at
the bitumen. 38-year lows and are unlikely to increase significantly in the
―Ideally the asphalt and bitumen industry would like to see year ahead.
the oil companies import the bitumen, but we do not see any
serious moves in this direction,‖ says Hechter.
He says this means the importation of bitumen is the only
option available to the industry, even though the size of the
imported load in itself also proves problematic, as South
Africa would typically source roughly 4 000 t of bitumen at
any point in time. ―There are only a limited number of ships
able to take these small loads, as they are not financially
attractive. And remember, we are competing with India and
China, which are taking loads of 30 000 t to 40 000 t at a
time on a regular basis.‖
Source: Engineering News, Irma Venter, December 2011
Source: Cement and Concrete Institute; Econometrix, 10 January
2012
Domestic and international Holcim, the world’s second-largest cement maker, will book
a $819m charge in the fourth quarter after writing off an
cementitious industry sales trends investment in AfriSam, one of southern Africa’s foremost
and news cement manufacturers, and rerating its assets in
construction markets ranging from Spain to the US.
The Swiss company is writing off €343m in debt and interest
In recent months, the y-o-y growth in cement sales has owed to it by AfriSam, which paves the way for the Public
been relatively buoyant in contrast with the official building Investment Corporation (PIC), South Africa’s state pension
statistics released by Stats SA which have suggested that manager, to take over the debt-laden company.
the building industry has been weak. Therefore, it is "It’s a little bit of a surprise, but it comes down to the theme
conceivable that the relative strength of the y-o-y growth in of excess capacity," said Tim Cahill, an analyst at J&E Davy
cement sales in recent months has been indicative of Holdings in Dublin, Ireland.
relative buoyancy in informal building activity. This would "Now companies and especially their accountants are taking
suggest that the building industry may be doing better than the view that demand is not returning any time soon. This is
what the Stats SA building data have suggested. the first of such writedowns, and we will see more
In December, the y-o-y growth in cement sales increased by throughout the industry," said Mr Cahill.
0.2% compared with 9.1% in November. If one adjusts for The PIC, which manages about R1000bn in South African
differences in the number of sales days, the y-o-y growth in state pensions, wants to restructure more than R20bn of
cement sales actually increased by 10.7%. AfriSam’s near-term debt into equity.
Nonetheless, one must bear in mind that the month of It is exposed to about R10bn of AfriSam debt. But the North
December is not a reliable indicator of trends, particularly as Gauteng High Court recently sanctioned its conversion of
R4,7bn — of a total of about R12bn in senior debt due on
Build Trends Page 10February 3 — into equity, saying it was exercising its The producer has been seeking to sell assets to help cut
contractual rights. debt by about $2,6bn this year.
About 90% of senior noteholders have given the green light Ratings agencies Standard & Poor’s and Moody’s cut
to a restructuring, which the PIC says will reduce AfriSam’s Lafarge’s credit rating to below investment grade earlier this
debt by about R15bn. year, citing poor US and European construction markets,
This will leave the cement maker with a R6,5bn debt burden and political turmoil in the Middle East.
charged at interest rates of about 11%. Group net debt was €14,3bn at the end of the third quarter,
This would have had the effect of diluting Holcim’s 15% compared with €14,7bn in the same period last year.
stake in AfriSam to less than 1%, but the Swiss-based
company has now written off most of this amount and says it Source: Business day, Mark Allix, 22 December 2012
will retain a 2% stake.
In 2006, Holcim formed AfriSam by selling 39% of its South
African business to black investors and retaining a 15% Pretoria Portland Cement (PPC) is lagging the South African
stake. But the recession affected the highly leveraged cement market, despite industry sales for the quarter to
empowerment deal badly. December last year increasing 7% over the same period in
The acquisition was funded by debt ranging from quarterly 2010.
Euribor rates plus 6,25% to much riskier payment-in-kind PPC says its dominant position in the lacklustre Western
notes due in 2014, drawing interest of 23% a year, of which Cape has hurt domestic sales, with steep national energy
Holcim held nearly €400m-worth. price rises further draining its resources.
However, the PIC has not yet indicated it has the necessary But it said in a trading update that trends in cement demand
support among the black empowerment shareholders in and prices should result in improved results for the group
AfriSam for it to take control of 98% of the company and during the first half of this financial year.
avert a default. "The Western Cape had not performed as well as the (rest
Holcim, like rival French global cement maker Lafarge, has of the) market, and as PPC is the biggest supplier in the
suffered deeply from the worldwide financial crisis, and has province, our national sales are currently below industry
been reported to be divesting itself of non-performing average," Kevin Odendaal, PPC executive for investor
assets. relations and strategy, said.
The news comes at a time when global rating agencies will The group said cement sales in Zimbabwe continued to
be watching for any policy shifts at conferences held by the grow on cash-in-hand demand from the rural market, but
African National Congress (ANC) this year, which could cement sales in Botswana declined, in line with a general
tarnish South Africa’s sovereign credit ratings. construction industry slowdown in that country.
Fitch, the rating agency, sounded a warning when it Mr Odendaal said there were few formal projects in
changed the outlook on its BBB+ rating for South Africa to Zimbabwe, and that Botswana’s government had pulled
negative from stable recently, following a similar step by back on infrastructure spending. However, he said PPC was
Moody’s in November 2011. well positioned to meet demand for aggregates in
Standard & Poor’s (S&P) so far has kept a stable outlook on Botswana, driven by road projects and niche developments,
its BBB+ rating for the country. having bought three quarries there for R60m late last year.
Moody’s sovereign credit rating for SA is A3, one notch The group suffered a difficult 12 months to the end of
above both Fitch’s and S&P’s. September. Group revenue was almost flat, but improved
Coface, the international credit insurer, also downgraded the product selling prices compensated for lower sales volumes.
business credit risk of a number of European countries, Operating profit fell 19%, and earnings per share dropped
fearing increased risk of debtor defaults from the euro zone. 22% from a year earlier.
It said South Africa had a credit risk rating of A3 negative Phase one of Pretoria Portland Cement’s (PPC’s) Western
watch, which had remained constant since 2008, indicating Cape modernisation project was on track for completion by
relative stability in the local economy compared with Europe April.
and other emerging economies. Phase one involved the upgrade of kiln 6 at its De Hoek
factory at a cost of R280 million. The final environmental
Source: Business Day, Mark Allix, 16 January 2012 impact assessment for phase two, at PPC’s Riebeeck
factory, had been submitted to the authorities, chairman
Bheki Sibiya told PPC’s annual general meeting.
Paris-based Lafarge, the world’s biggest cement maker, is In August last year PPC said it had cut back its planned
seeking a buyer for its cement operations in SA in a capacity expansion project in the Western Cape by a third
transaction that may be worth up to $800m, according to and extended the timeframe.
media reports. In its new plan, it would spend R3 billion over six years
Potential bidders may include Indian industrial conglomerate instead of R4.5bn over four years and upgrade and increase
Aditya Birla Group, the reports said, but Lafarge capacity at its existing Riebeeck and De Hoek operations
spokeswoman Christel des Royeries declined to comment, instead of building a new factory.
while Aditya Birla Group spokeswoman Pragnya Ram could
not be reached. Source: Business day, Mark Allix, 31 January 2012; Business
Lafarge, one of the largest cement producers in SA, does Report, Roy Cokayne, 31 January 2012
not publish financial results from the country.
Build Trends Page 11AfriSam (South Africa) (Pty) Ltd
Reg No: 2006/005910/07
PO Box 6367
Weltevredenpark 1715
South Africa
Tel: (011) 670 5721
e-mail: alet.vanstaden@za.afrisam.com
www.afrisam.com
Tel: 0860 141 141
e-mail: customer.service@za.afrisam.com
Main sources of information:
Industry Insight
Tel: (021) 554 0886 / 0688
www.industryinsight.co.za
Econometrix
Tel: (011) 483 1421
www.econometrix.co.za
Cement and Concrete Institute
Tel: (011) 315 0300
www.cni.org.za
Disclaimer:
AfriSam, its shareholders, employees and agents
accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage
of any kind or nature, whatsoever arising, from the use
of or reliance on information provided in this publication.
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